Kindred Healthcare Inc. (ticker: KND, exchange: New York Stock Exchange (.N))
News Release -
Kindred Healthcare Comments on Medicare Payment Changes for Long-Term Acute Care HospitalsCompany Reaffirms 2007 Earnings Guidance of $1.50 to $1.60 per Diluted
Louisville, KY (May 2, 2007) - Kindred Healthcare, Inc.
(the "Company") (NYSE: KND) today announced that the Centers
for Medicare and Medicaid Services ("CMS") issued late yesterday
regulatory changes regarding Medicare reimbursement for long-term acute
care ("LTAC") hospitals (the "Final Rule"). The
changes finalized a regulation originally proposed on January 25, 2007
and will become effective for discharges occurring on or after July 1,
2007. The Company also announced that on May 1, 2007 CMS released a regulation
increasing Medicare payments for skilled nursing facilities by 3.3%. Based
upon its assessment of these regulatory changes, the Company reaffirmed
its 2007 earnings guidance of $1.50 to $1.60 per diluted share.
The Final Rule projects an overall decrease in payments to all Medicare
certified LTAC hospitals of 3.8% compared to an impact estimated at 2.9%
under the proposed rule. Included in the Final Rule are (1) an increase
to the standard federal payment rate of 0.71%; (2) revisions to payment
methodologies impacting short stay outliers, which reduce payments by
0.9%; (3) adjustments to the wage index component of the federal payment
resulting in projected reductions in payments of 1.0%; (4) an increase
in the high cost outlier threshold from $18,477 per discharge in the proposed
rule to $22,954 in the Final Rule resulting in projected reductions of
2.5%; and (5) an extension of the policy known as the "25 Percent
Rule" to all LTAC hospitals, with a three-year phase-in, which CMS
projects will not result in payment reductions for the first year of implementation
but estimates reductions of 2.4% in the second year of implementation.
The Final Rule also states that the annual update to the Long-Term Care
Diagnostic Related Groups ("LTC DRG") classifications and
relative weights will be made in a budget neutral manner, effective October
1, 2007. As such, the estimated aggregate payments under the long-term
acute care prospective payment system ("LTAC PPS") would be
unaffected by the annual recalibration of LTC DRG payment weights.
The Company estimates that the Final Rule will result in a 2.5% reduction
in payments to the Company's LTAC hospitals, before mitigation.
For the second half of 2007, the Final Rule could reduce its hospital
Medicare payments by approximately $25 million. The Company had previously
disclosed an estimated 2007 impact of approximately $20 million. The Company's
estimates are based on an analysis of recent internal data. The Company
emphasizes that comparisons between the CMS impact tables for the proposed
and Final Rule should be made with caution since CMS did not include in
the proposed rule's impact table an estimate for changes in the
high cost outlier threshold but did include an estimate for this adjustment
in the Final Rule impact table. Accordingly, the Final Rule impact table
appears to reflect a larger negative impact as compared to the proposed
rule than is actually the case.
The Final Rule expands the so-called "25% Rule" to all LTACs.
Under the Final Rule, all LTAC hospitals will be paid LTAC PPS rates for
admissions from a single referral source up to 25%. Admissions beyond
25% would be paid using rates paid to short-term hospitals.
Under the Final Rule, the 25% threshold would be phased in over three
years. Hospitals having fiscal years beginning on or after July 1, 2007
and before October 1, 2007, including most of the Company's hospitals,
will have their admission cap initially established at 75%. For most of
the Company's hospitals, this 75% cap would apply until September
1, 2008, after which the cap would be reduced to 50%. The 25% cap would
not apply to most of the Company's hospitals until after September
Kindred's President and Chief Executive Officer, Paul J. Diaz,
characterized the Final Rule as "arbitrary," and commented
that CMS has ignored leaders in Congress and MedPAC who oppose the payment
changes adopted by CMS and expressed a strong preference to define the
appropriate role for LTACs through certification criteria. "We are
deeply disappointed that CMS continues to implement arbitrary changes
to the LTAC payment system when both Congress and MedPAC have objected
to the very rules that CMS has now finalized. It is frankly irresponsible
for CMS to ignore objective data demonstrating that the policy justifications
for these payment changes are simply inaccurate. Leaders in both houses
of Congress have introduced legislation that would ensure that patients
admitted to LTACs need the unique, intensive services that we can provide.
Both H.R. 562, introduced by Congressmen English and Pomeroy, and S. 338
introduced by Senators Conrad and Hatch will advance post-acute care policy
by ensuring appropriate placement of patients. CMS has not only refused
to engage in this policy discussion, but the regulations it now finalizes
run counter to rational policy. We agree with Congressional leaders and
MedPAC that clinical certification criteria, not payment cuts, is the
appropriate policy course for LTACs."
Mr. Diaz also commented on CMS's decision to extend the LTAC 25%
rule to freestanding LTACs. "Dictating where medically complex patients
can obtain needed care based exclusively on arbitrary admission limits
ignores the clinical and quality of care considerations that should be
the primary determinant of access to LTAC care." Mr. Diaz commented
further, "As we have emphasized before, the actual impact of a 25%
rule will vary widely depending on the operating model that specific freestanding
LTACs use. For the most part, our freestanding LTACs are deeply rooted
in their communities and have long-standing relationships with a number
of referral sources. In addition, we continue to develop relationships
with non-Medicare private payer sources to the point that the percentage
of our hospital revenues coming from private payers is approximately 30%."
Mr. Diaz added, "We will continue to provide objective data to
CMS in an effort to change regulations that are arbitrary, misguided and
frankly at odds with rational post-acute care policy. At the same time,
we will press Congress to enact rational policy for LTACs and force CMS
to consider policies that are based on data, not subjective perceptions,
and are designed to serve the best interests of Medicare's most
critically ill beneficiaries."
Earnings Guidance for 2007 Maintained
The Company maintained its 2007 earnings guidance for continuing operations.
The Company expects consolidated revenues for 2007 to approximate $4.5
billion. Operating income, or earnings before interest, income taxes,
depreciation, amortization, and rents, is expected to range from $580
million to $587 million. Rent expense is expected to approximate $347
million, while depreciation, amortization and net interest expense are
expected to approximate $127 million. Net income from continuing operations
for 2007 is expected to approximate $60 million to $64 million or $1.50
to $1.60 per diluted share (based upon diluted shares of 40 million).
The Company indicated that the guidance includes the operations of its
institutional pharmacy business for the full year but does not include
any costs associated with the consummation of the proposed spin-off transaction.
The Company's 2007 earnings guidance also includes the estimated
impact of the previously announced transactions with Ventas, Inc. ("Ventas")(NYSE:VTR).
In addition, the Company's 2007 earnings guidance also includes
the estimated impact of the Final Rule. The guidance does not include
any other significant changes in reimbursement and does not take into
account the effects of any other material acquisitions or divestitures.
While the Company does not provide quarterly earnings guidance, management
believes that investors should consider the seasonality of the Company's
quarterly earnings, particularly the weakness in hospital admissions during
the third quarter coupled with a negative Final Rule that would take effect
on July 1, 2007.
Forward Looking Statements
This press release includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements
regarding the Company's expected future financial position, results
of operations, cash flows, financing plans, business strategy, budgets,
capital expenditures, competitive positions, growth opportunities, plans
and objectives of management and statements containing the words such
as "anticipate," "approximate," "believe,"
"plan," "estimate," "expect," "project,"
"could," "should," "will," "intend,"
"may" and other similar expressions, are forward-looking statements.
Such forward-looking statements are inherently uncertain, and stockholders
and other potential investors must recognize that actual results may differ
materially from the Company's expectations as a result of a variety
of factors, including, without limitation, those discussed below. Such
forward-looking statements are based upon management's current expectations
and include known and unknown risks, uncertainties and other factors,
many of which the Company is unable to predict or control, that may cause
the Company's actual results or performance to differ materially
from any future results or performance expressed or implied by such forward-looking
statements. These statements involve risks, uncertainties and other factors
discussed below and detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
In addition to the factors set forth above, other factors that may affect
the Company's plans or results include, without limitation, (a)
the Company's ability to operate pursuant to the terms of its debt
obligations and its master leases with Ventas; (b) the Company's
ability to meet its rental and debt service obligations; (c) the Company's
ability to complete the recently announced facility acquisitions with
Ventas, including the satisfaction of all closing conditions, and its
ability to complete the resale of such facilities; (d) the Company's
and AmerisourceBergen Corporation's ability to complete the proposed
merger of their respective institutional pharmacy operations, including
the receipt of all required regulatory approvals and the satisfaction
of other closing conditions to the proposed transaction; (e) adverse developments
with respect to the Company's results of operations or liquidity;
(f) the Company's ability to attract and retain key executives and
other healthcare personnel; (g) increased operating costs due to shortages
in qualified nurses, therapists and other healthcare personnel; (h) the
effects of healthcare reform and government regulations, interpretation
of regulations and changes in the nature and enforcement of regulations
governing the healthcare industry; (i) changes in the reimbursement rates
or methods of payment from third party payors, including the Medicare
and Medicaid programs, changes arising from and related to the Medicare
prospective payment system for long-term acute care hospitals, including
the Final Rule, the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003, and changes in Medicare and Medicaid reimbursements for the
Company's nursing centers; (j) national and regional economic conditions,
including their effect on the availability and cost of labor, materials
and other services; (k) the Company's ability to control costs,
particularly labor and employee benefit costs; (l) the Company's
ability to successfully pursue its development activities and successfully
integrate new operations, including the realization of anticipated revenues,
economies of scale, cost savings and productivity gains associated with
such operations; (m) the increase in the costs of defending and insuring
against alleged professional liability claims and the Company's
ability to predict the estimated costs related to such claims; (n) the
Company's ability to successfully reduce (by divestiture of operations
or otherwise) its exposure to professional liability claims; (o) the Company's
ability to successfully dispose of unprofitable facilities; and (p) the
Company's ability to ensure and maintain an effective system of
internal controls over financial reporting. Many of these factors are
beyond the Company's control. The Company cautions investors that
any forward-looking statements made by the Company are not guarantees
of future performance. The Company disclaims any obligation to update
any such factors or to announce publicly the results of any revisions
to any of the forward-looking statements to reflect future events or developments.
As noted above, the Company's earnings guidance includes the financial
measure referred to as operating income. The Company's management
uses operating income as a meaningful measure of operational performance
in addition to other measures. The Company uses operating income to assess
the relative performance of its operating divisions as well as the employees
that operate these businesses. In addition, the Company believes this
measurement is important because securities analysts and investors use
this measurement to compare the Company's performance to other companies
in the healthcare industry. The Company believes that net income from
continuing operations is the most comparable measure, in relation to generally
accepted accounting principles, to operating income. Readers of the Company's
financial information should consider net income from continuing operations
as an important measure of the Company's financial performance because
it provides the most complete measure of its performance. Operating income
should be considered in addition to, not as a substitute for, or superior
to, financial measures based upon generally accepted accounting principles
as an indicator of operating performance. A reconciliation of the estimated
operating income to net income from continuing operations provided in
the Company's earnings guidance is included in the Company's
April 30, 2007 press release, which is available on its website at www.kindredhealthcare.com.
About Kindred Healthcare
Kindred Healthcare, Inc. (NYSE:KND) is a Fortune 500 healthcare services
company, based in Louisville, Kentucky, with annualized revenues of $4.5
billion that provides services in approximately 600 locations in 38 states.
Kindred through its subsidiaries operates long-term acute care hospitals,
skilled nursing centers, institutional pharmacies and a contract rehabilitation
services business, Peoplefirst Rehabilitation Services, across
the United States. Kindred's 56,000 employees are committed to providing
high quality patient care and outstanding customer service to become the
most trusted and respected provider of healthcare services in every community
we serve. For more information, go to www.kindredhealthcare.com.
Richard A. Lechleiter
Executive Vice President and Chief Financial Officer